Foreign tax credit – (Part 2)

Unilateral tax credit –

Section 91 of Income Tax Act, 1961 (‘Act’) enables its residents to avail unilateral tax credit for foreign taxes paid outside India in a country with which India has not signed any tax treaty. Following conditions are required to be satisfied by the for availing unilateral tax credit –

  • Person claiming credit must be resident in India for the said previous year
  • Income is from a source outside India. In other words, income shall not be deemed to accrue or arise in India
  • Tax has been paid in the foreign country << The taxpayer should be able to prove that he/ she has paid income tax on such income in the foreign country>>
  • Absence of agreement under section 90 for the relief or avoidance of double taxation.

Computation of unilateral tax credit

  • Determination of the amount/ income that has been double taxed
  • On the doubly taxed income, tax shall be calculated at the Indian rate of tax as well as at the foreign rate of tax
  • Tax relief granted shall be lower of following – (Amount of tax calculated at the Indian rate of tax or the Amount of tax calculated at the foreign rate of tax)

Further, for the purpose of calculation of unilateral tax credit, credit is only available for the foreign income that is taxable in India (i.e. only proportionate credit for the taxes paid in foreign country shall be available)

Illustration –

Certain vexed issues –

  • Aggregation of income/losses from several foreign countries – In Bombay Burmah Trading Corpn. Ltd. (126 Taxman 403), it was held that relief under section 91(1) is provided by way of reduction of tax (i.e. by deducting the tax paid abroad) on such doubly taxed income from tax payable in India. Hence, the relief can be worked out only if it is provided Country-wise.
  • DTAA in place with foreign country but the taxes paid in the foreign country is not covered by the DTAA – a. In Tata Sons Ltd. v. DCIT (10 taxmann.com 87(Mum)), Tribunal examined the allowability of state taxes as deduction under section 37(1) vis-à-vis eligibility of relatable credit under section 90/91 of the Act. It was concluded that the tax credit would be allowed under section 91 of the Act since the treaty does not refer to State/Federal taxes. In other words, provisions of treaty or the Act (section 91) whichever, is more beneficial for the assessee should be applied. b. In Manpreet Singh Gambhir [2008] 26 SOT 208 (Delhi) , the Delhi Tribunal declined to allow a credit for state income tax paid in the US without examining section 91 of the Act. The Tribunal held referring to Article 2 of the India-USA DTAA that the taxes covered under the DTAA are in respect of taxes paid in the United States only for the Federal Income-tax imposed by internal revenue code and not the State Income-tax.
  • Timing of payment of taxes outside India not relevant for claiming credit – In JCIT v. Petroleum India International (26 SOT 105), assessee had claimed relief under section 91(1) of the Act on taxes paid in Kuwait. However, the Assessing Officer disallowed the assessee’s claim of relief under section 91(1) of the Act for the reason that the assessee had not paid taxes in Kuwait before the end of the previous year and had made actual payment of taxes in five installments in subsequent year. The Mumbai Tribunal in the above case held that the language of section 91(1) of the Act is unambiguous and provides that where the assessee proves that in respect of his income, which accrued or arose during the previous year outside India, he had paid tax in any Country with which there is no agreement under section 90 for the relief or avoidance of double taxation, he shall be entitled to deduction from the Indian income tax payable by him of a sum calculated on such doubly taxed income. Nowhere in the provision of section 91(1), is it provided that the payment of taxes outside India shall be paid during the relevant previous year itself. The purpose of provision of section 91(1) is to provide relief in a case where assessee has paid taxes outside the Country and not to subject such assessee to double taxation on the same income. The assessee had discharged its onus of proving that it had in fact made the payment of taxes in a foreign Country in subsequent periods.

<I will discuss Bilateral tax credit mechanism in the coming parts>

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